Stop Digging Into Your Savings With These 3 Types of Reverse Mortgages

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Reverse mortgages can offer financial relief and flexibility for seniors looking to tap into their home equity. However, with three types of reverse mortgages available, understanding which one suits your needs can be challenging. Each type offers unique benefits and caters to different financial situations and goals, making it crucial to know your options before deciding. Here are the three types of reverse mortgages you should consider.

Home Equity Conversion Reverse Mortgages

A Home Equity Conversion Mortgage (HECM) is the most popular type of reverse mortgage federally insured by the Federal Housing Administration (FHA). It’s specifically designed for homeowners aged 62 and older who want to convert a portion of their home equity into cash while retaining home ownership. 

Eligibility Requirements

To qualify for an HECM, homeowners must be at least 62 years old and occupy the property as their primary residence. The home must meet specific property standards set by the FHA. These standards include conditions related to safety and structural soundness. Additionally, the home must comply with flood zone regulations.

Loan Amount 

The amount a homeowner can borrow through an HECM depends on several factors — the age of the youngest borrower, the appraised home value, prevailing interest rates and the FHA lending limit. Generally, older homeowners with more valuable homes and lower interest rates can borrow larger amounts. 

Payment Options

HECMs offer several ways for borrowers to access their funds. They can choose a lump sum payment at closing, receive regular monthly payments for a set period or as long as they live in the home, or opt for a line of credits that allows flexible withdrawals as needed. This flexibility helps borrowers manage their cash flow according to their financial needs.

Repayment

The loan doesn’t require monthly mortgage payments and is typically repaid when the borrower sells the home, moves out permanently or passes away. If the loan balance exceeds the home’s value at the time of repayment, the FHA insurance ensures that neither the borrower nor their heirs are liable for the difference.

Costs and Fees

HECMs come with various costs, including upfront charges like origination fees, mortgage insurance premiums and closing costs. There are also ongoing costs, such as annual mortgage insurance premiums and servicing fees. These costs can be rolled into the loan balance or paid out of pocket. 

Counseling Requirement

Borrowers must fully understand the terms and implications of the loan. To ensure this, the FHA requires all prospective HECM borrowers to undergo counseling with a HUD-approved counselor. This helps to protect borrowers from potential misunderstandings and ensure they make an informed decision.

Single-Purpose Reverse Mortgages

Single-purpose loans are a less common type of reverse mortgage. State and local government agencies or nonprofit organizations typically offer them. Unlike HECMs, these loans are designed to be used for a specific purpose, as determined by the lender.

Purpose-Specific Funding

Funds can only be used for a specific purpose, which the lender usually predefines. Common uses include home repairs, improvements or paying property taxes. The limited use of funds is intended to help homeowners address specific needs that enhance their home’s safety, functionality and livability.

Eligibility Requirements

These loans are available to homeowners who meet specific income qualifications, as they’re often targeted toward low-to-moderate-income seniors. Eligibility criteria may vary based on the lender’s guidelines and the program’s goals.

Loan Amount and Terms

The loan amount is generally smaller than that of HECMs and is closely aligned with the cost of the specific purpose. The terms — including interest rates and repayment conditions — are usually more favorable, reflecting these loans’ targeted, often public service-oriented nature.

Repayment

Similar to other reverse mortgages, repayment typically occurs when the borrower sells the home, moves out permanently, or passes away. However, the lender determines these specific repayment terms, which the borrower should carefully review.

Cost and Accessibility

These loans often have lower costs than HECMs, making them an attractive option for eligible seniors with specific needs. However, they’re not as widely available and are subject to the availability of funds from the providing agency or organization.

Counseling and Assistance

Borrowers are usually required to receive counseling or assistance to understand the loan terms and specific limitations on using funds. This counseling is crucial for helping borrowers make informed decisions and use the loan proceeds appropriately. 

Proprietary Reverse Mortgages

Proprietary reverse mortgages are private loans backed by private companies rather than government agencies. They’re often referred to as “jumbo” reverse mortgages because they’re designed to cater to homeowners with high-value properties. As such, they offer larger loan amounts than the federally insured HECMs.

Higher Loan Limits

Proprietary reverse mortgages allow homeowners to borrow more than what’s typically available through HECMs. This feature makes them particularly attractive to owners of high-value homes who can’t access sufficient funds through standard reverse mortgage programs. 

Eligibility Requirements

Like HECMs, borrowers must generally be at least 62 years old and use the property as their main residence. However, the specific eligibility criteria — including property value thresholds, credit history and other financial considerations, can vary widely depending on the lender. 

Flexible Payment Options

Proprietary reverse mortgages offer flexibility in how borrowers receive their funds. Options often include a lump sum payment, monthly disbursements or a line of credit. This flexibility allows borrowers to tailor the loan to their financial needs and lifestyle preferences. 

Repayment Terms

Repayment typically occurs when the borrower sells the home, moves out permanently, or passes away. The amount owed is usually capped at the home’s value at the time of sale. This protects the borrower and their estate from owing more than the home’s worth. However, since the FHA doesn’t insure these loans, the terms can vary, and borrowers should carefully review and understand the repayment conditions.

Costs and Fees

While proprietary reverse mortgages can offer access to more funds, they may also come with higher costs, including origination fees, servicing fees and higher interest rates. These costs can significantly impact the repayable amount and should be considered when evaluating this loan type. 

No Government Insurance

Unlike HECMs, proprietary reverse mortgages aren’t insured by the federal government, meaning they don’t have the same protections, such as the cap on repayment amount. This lack of insurance can put their borrowers and lenders at higher risk.

Counseling and Information

While not always required, counseling is recommended for those considering a proprietary reverse mortgage. Understanding these loans’ terms, costs and risks is crucial for making an informed decision, particularly since they’re not subject to the same regulations and consumer protections as HECMs. 

So, How Do You Know Which to Choose?

Choosing the right type of reverse mortgage depends on your specific financial situation, goals and home value. HECMs are popular for many seniors because they’re federally insured and offer flexible payment options. If you have a high-value home and need to access more equity than HECMs allow, a proprietary reverse mortgage might be more suitable. However, it comes with higher costs and lacks government insurance.

Single-purpose reverse mortgages can be ideal for those who need to cover specific expenses, such as home repairs or property taxes. This mortgage type typically has lower costs, too. However, these loans are less flexible in terms of how you can use funds and may have stricter eligibility criteria. Before deciding, it’s essential to consult with a financial advisor or counselor to thoroughly understand the terms, fees and risks associated with each option. Being well-informed ensures the choice aligns with your financial needs and long-term plans. 

Reverse Mortgages Made Easy

Choosing the right type of reverse mortgage is a significant decision that requires careful consideration of your financial situation, home value and long-term needs. Whether you opt for an HECM, a high-value proprietary reverse mortgage or a purpose-specific single-purpose mortgage, each option has distinct advantages and limitations. 

Consulting with a financial advisor or housing counselor can provide valuable insights and ensure your choice aligns with your financial objectives. With the right information and guidance, you can make an informed decision that supports your financial security and peace of mind in retirement.